Is Salutica Berhad (KLSE:SALUTE) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Salutica Berhad (KLSE:SALUTE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Salutica Berhad

What Is Salutica Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Salutica Berhad had RM7.35m of debt, an increase on RM4.00m, over one year. But it also has RM53.1m in cash to offset that, meaning it has RM45.8m net cash.

How Healthy Is Salutica Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Salutica Berhad had liabilities of RM30.5m due within 12 months and liabilities of RM977.0k due beyond that. Offsetting this, it had RM53.1m in cash and RM9.92m in receivables that were due within 12 months. So it actually has RM31.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Salutica Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Salutica Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Salutica Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Salutica Berhad had a loss before interest and tax, and actually shrunk its revenue by 39%, to RM117m. That makes us nervous, to say the least.

So How Risky Is Salutica Berhad?

While Salutica Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM15m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Salutica Berhad you should be aware of, and 1 of them is concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.